The House and Senate – Weeding through proposed Tax Reform

From the Desk of Jennifer Kobylarz, CPA, MST

The House and Senate are currently working to reconcile the differences between their two tax reform bills. Until we have further clarification on a final bill, we have summarized these proposed changes and have listed them below. We will keep you updated as the final reconciliations are available.

House Bill Vs Senate Bill - Corporate Taxation

Provision

House Bill

Senate Bill

Tax Rate

  • Reduces to 20%
  • Lowers current Dividends
    Received Deduction from 70/80
    to 50/65
  • Reduces to 20%, but delays the
    effective date until 2019
  • Lowers the current Dividends
    Received Deduction from 70/80
    to 50/65

Interest Expense Deduction*

  • Limited to 30% of income
  • Uses EBITDA
  • Includes a caveat for floorplan interest (Dealers will not be able to utilize full expensing)
  • Disallowed interest expense can be carried forward for 5 years
  • Exempts businesses with average gross receipts of $25 million or less
  • Limited to 30% of income
  • Uses EBIT
  • Includes a caveat for floorplan interest (Dealers will not be able to utilize full expensing)
  • Disallowed interest expense can be carried forward indefinitely
  • Exempts small businesses with average gross receipts of $15 million or less

§179 Expense & Full Expensing*

  • §179 Expense
    • $5 Million / $20 Million
    • Expires 2023
    • Includes energy efficient heating and A/C
  • Full Expensing
    • Allows for the full and immediate expensing of qualified property for 5 years
    • Not available for taxpayers who expense floorplan interest
  • §179 Expense
    • $1 Million / $2.5 Million
    • No Expiration Date
    • Includes qualified real property (Roofs, HVAC, fire protection alarm systems, security systems)
  • Full Expensing
    • Includes for new equipment for 5 years with an annual 20% phaseout each year thereafter
    • Not available for taxpayers who expense floorplan interest

Net Operating Losses

  • Eliminates the NOL carryback but allows for indefinite carryforwards
  • Limits the applicability of NOL deductions to 90% of taxable income
  • Eliminates the NOL carryback
  • Limits NOL deductions to:
    • 90% of taxable income from 2018-2022
    • 80% of taxable income in 2023

Estate Tax

  • Increases the current exemption to $10 million, indexed for inflation, to be fully repealed in 6 years
  • Doubles the current exemption

International Taxation

  • Income
    • Moves towards a territorial
      system
    • Includes rules to stop BEPS
      • 50% of excess returns by controlled foreign corporation in US shareholder’s income
      • Excise tax on payment made to foreign firms unless claimed as ECI
  • Deemed Repatriation
    • Liquid Assets Tax = 14%
    • Illiquid Assets Tax = 7%
  • Income
    • Moves towards a territorial system
    • Anti-abuse rules to prevent BEPS
  • Minimum tax on the excess of 10% of modified taxable income over an amount equal to regular tax liability
  • Deemed Repatriation
    • Liquid Assets Tax = 14.5%
    • Illiquid Assets Tax = 7.5%

Other Items

  • Cash Accounting
    • Increases the eligibility for small businesses to benefit from the use of cash accounting
    • Increases the threshold to $25 million
  • Business Credits & Deductions
    • Eliminates credits for: Orphan Drugs, Energy, Private Activity Bonds, Rehabilitation and Capital Contributions
  • Cash Accounting
    • Increase the eligibility for small businesses to benefit from the use of cash accounting
    • Increases the threshold to $15 million
  • Business Credits & Deductions
    • Modifies credits for: Orphan Drugs and Rehabilitation

*These provisions would also apply to pass-through business entities.

See PDF version of this table 

House Bill Vs Senate Bill - Individual Taxation

Provision

House Bill

Senate Bill

Tax Brackets, Standard Deduction & Personal Exemptions

  • Has four tax brackets with a bubble tax (bubble tax phases out the 12% tax bracket)
  • Increases the standard deduction
  • Eliminates the personal exemptions
  • Keeps current seven bracket system, but lowers the max rate to 38.5%
  • Increases the standard deduction
  • Eliminates the personal exemptions

Itemized Deductions

  • SALT – Retains the real estate tax deduction (capped at $10,000)
  • Mortgage Interest-Allows, but caps at $500,000
  • Charitable ContributionsIncreases deduction to 60%
  • Repeals: Pease Limitation, Personal casualty losses, tax prep fees, alimony payments, moving expenses, medical expenses
  • Eliminates all SALT but retains the real estate tax deduction (capped at $10,000)
  • Mortgage-Keeps deduction for acquisition debt but repeals the deduction for equity debt
  • Charitable ContributionsIncreases deduction to 60%
  • Repeals Pease Limitations, Personal casualty & theft losses, tax prep fees, ALL miscellaneous itemized deductions that are currently subject to the 2% floor, exclusion for qualified bicycle commuting reimbursements
  • Keeps Medical expenses deductions and temporarily decreases thee AGI threshold to 7.5% (2017 & 2018)

Above the Line Deductions

  • Eliminates for teachers, student
    loan interest, moving expenses,
    tuition waiver for graduate
    students
  • Doubles for teachers (to $500)
  • Eliminates for student loan interest, moving expenses
  • Keeps tuition waiver for graduate students

Child & Family Tax Credits

  • $1,600 child tax credit and $300 per-person family tax credit
  • MFJ Filers begins at $230,000
  • Only first $1,000 of the credit is refundable
  • Increases child tax credit to $2,000 and a $500 per-person family tax credit
  • Phase out for MFJ filers begins at $500,000
  • Increases age limit to 18 for tax years 2018-2024
  • Only first $1,000 of the credit is refundable

529 Plans

  • Allows plans to be created for unborn children and for $10,000 to be used for private elementary and secondary school expenses annually
  • Allows funds to be used for public, private, and religious private elementary and secondary school and home school expenses

Pass-Through Income

  • 25% tax rate on business income
  • 9% for an active owner or shareholder making less than $150,000 (phased in over 5 years-11% in 2018 & 2019, 10% in 2020, 9% in 2022)
  • Anti-Abuse Rules: 70/30
  • Current rules on self-employment tax would remain unchanged
  • 23% deduction for qualified domestic business income
  • Limited to 50% of W-2 wages from S-Corp or Partnership
  • Doesn’t apply to personal services income unless AGI is less than $150,000 (MFJ) or $75,000 (S)
  • Phaseout:
    • Non-Personal Service Provider ($150,000 MFJ / $75,000 S);
    • Personal service provider ($50,000 MFJ / $25,000 S)

Retirement Accounts

  • No Major Changes
  • Eliminates catch-up contributions for high-wage employees and consolidates contribution limits for 457(b) plans to match 401(k) and 403(b) plans

Like Kind Exchanges

  • Amends §1031 to only apply to real property
  • Tangible and intangible property will no longer be allowed
  • Amends §1031 to only apply to real property
  • Tangible and intangible property will no longer be allowed

Exclusion of Gain on Sale of Personal Residence

  • 2 of 5 Rule is now 5 of 8 Rule
  • Once every 5 years
  • Makes the exemption subject to an income phaseout
  • 2 of 5 Rule is now 5 of 8 Rule
  • Once every 5 years

Individual Mandate

  • No change
  • Repeals the individual mandate under ACA

Expiration

  • Most tax cuts are permanent
  • All individual tax cuts will expire at the end of 2025

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